Asset decumulation: optimising income needs for retirement

Abstract

This paper considers the issues arising in respect of decumulation: that is, converting assets saved for retirement into regular income. Decumulation may be accomplished by drawing down on capital from time to time, or by purchasing a promise of regular income through annuitisation, using insurance mechanisms. The paper identifies problems that arise as a result of draw down without longevity insurance. It goes on to identify the difficulties in respect of traditional annuity products from supply side and demand side perspectives, leading to a conclusion of market failure. The arguments for policy intervention are canvassed, and the annuitised fund described in Wadsworth et al (2001) is put forward as a possible market-based solution. Simulation methods focused on variation in longevity outcomes are then used to explore the risks in operation of a simplified annuitised fund, and some government interventions identified that would be required to establish such funds.